The amendments to the Civil Code of the Russian Federation (the “Civil Code”) concerning corporate law, which entered into force on 1 September 2014, form the most significant development since the shaping of modern corporate law in Russia. The legislator’s rationale behind the reform of corporate law is to create a more favourable and democratic environment for businesses, while at the same time taking into account the rights and interests of creditors, participants/shareholders and the companies themselves. New legislative mechanisms are also designed to increase the attractiveness of Russian joint ventures for foreign investors.
In this Alert we cover the following main aspects (please click on each link to be taken to the relevant paragraph):
- New classification of legal entities
- Corporations and unitary entities
- Public and non-public commercial entities
- Corporate agreements
- Payment of charter capital
- Management bodies of a corporation
- The two-signature principle
- Collective management body of a public joint-stock company
- Certification of decisions of the general shareholders/participants meeting
- Liability to the legal entity
- Power of attorney to act before the registration authorities to be notarised
- Changes to the reorganisation and liquidation procedures for legal entities
New classification of legal entities
Corporations and unitary entities
The amendments introduced a new classification of legal entities, following which all entities are now divided into corporations and unitary legal entities. The main criterion to distinguish between the two categories is whether the founders (participants) have the right of participation (membership) in a legal entity. Thus, the founders (participants) of a corporation have the right of participation (membership) in it and constitute its higher body, while the members of the unitary legal entity do not acquire membership rights.
Public and non-public commercial companies
One of the most important changes is that commercial companies are now divided between public and non-public. A public company is a joint-stock company
- whose shares and securities that are convertible into shares are placed by public offering or are publicly traded on the conditions prescribed by securities laws; or
- whose charter and corporate name contain an indication that the company is public.
All other companies that do not meet at least one of the above characteristics are considered non-public. Thus, in practice, from 1 September 2014, all active joint-stock companies existing in the legal form of open joint-stock company are considered public joint-stock companies, while closed joint-stock companies and limited liability companies are deemed to be non-public. Even if a limited liability company offers bonds through public subscription, it does not become public in the sense of corporate law.
Upon incorporation, to be included in the Unified State Register of Legal Entities, each public joint-stock company must submit information on its corporate name which should contain a reference to the fact that it is a public company. Joint-stock companies established before 1 September 2014 which meet the characteristics of a public company are deemed to be public joint-stock companies, regardless of whether their corporate name states that the company is public.
Existing joint-stock companies can keep their name until the first amendment to their charters is made.
In relation to existing companies with additional liability, the provisions of the Civil Code on limited liability companies will apply. In relation to closed joint-stock companies, the provisions of the Civil Code on joint-stock companies and the Federal Law “On Joint-stock Companies” on closed joint-stock companies will apply until the first amendment to their charters is made.
Unlike public companies, non-public companies enjoy more flexibility in the way corporate relations are regulated. Thus, a non-public company can, under certain conditions, determine the jurisdiction of its management bodies as it sees fit and vary the procedure for convening and holding the general meeting that is provided in the Civil Code. It can also define participants’/shareholders’ rights non-proportionally to their stakes in the company.
To enhance the protection of minority shareholders in a public joint-stock company, art. 97 of the Civil Code provides for certain mandatory requirements, such as the establishment of a collective management body with at least five members, the disclosure of information required by law, and the freedom to alienate shares without having to obtain any consents. These requirements may not be varied in the company’s charter.
Joint-stock companies that are planning to enter the capital markets and are preparing for this move in future must have a name referencing to fact that they are a public joint-stock company, otherwise they will not be eligible to offer shares through public subscription.
The amendments to the Civil Code introduced a new general concept of ‘corporate agreement’ and common legal regulations for agreements between the members of commercial companies of various legal forms. Very significantly, a corporate agreement can now be governed by foreign law provided that one of the parties is a foreign person. Third parties may be party to a corporate agreement alongside the company’s shareholders/participants. However, the company itself still cannot be a party to a corporate agreement. When the validity of a corporate decision or transaction is being challenged, the corporate agreement will prevail over the company's charter.
Participants in a non-public company who have concluded a corporate agreement must notify the company of the conclusion of the corporate agreement, while its contents need not be disclosed. Failure to notify entitles the company participants who are not party to the corporate agreement to claim compensation for any losses they may have suffered. For public companies, information on the conclusion of a corporate agreement must be disclosed in the manner provided by law.
Decisions of a body of a commercial company can be invalidated by the court at the request of a party to that agreement on the ground that the corporate agreement has been breached, provided that all the company participants were party to that corporate agreement at the time when the challenged decision was adopted.
Payment of charter capital
To establish a joint-stock company, three-quarters of the charter capital must be paid up prior to registration, and the remainder must be paid up within the first year of activity of the company.
For limited liability companies it is not necessary to pay any portion of the charter capital before registration. However, the charter capital must be fully paid up within four months of the company's registration. Until the charter capital of the newly-established limited liability company has been paid in full, the participants are subsidiarily liable for the obligations of company, and their liability is not limited in any way. We therefore recommend appointing a person you can fully trust as General Director of the new company and pay the charter capital as soon as possible after the registration of the company.
Management bodies of a corporation
Another significant change is the provision of the authority of the sole executive body to several persons acting jointly, or the formation of a number of sole executive bodies who may act independently of each other – the so-called “two-signature rule”. At the same time, it is also possible to appoint a natural or legal person as the sole executive body.
Similar rules have been in place for a long time, for example in Germany where a company is often represented by several managers and so-called Prokuristen (authorised officers). All those enjoying such authority are entered into the commercial register, where it is also stated how the company is represented by these persons (for instance, by two managers or one manager and an authorised officer). Only practice will show how the “two-signature rule” will work in Russia. This rule seems to be particularly relevant for joint venture investments, especially those with a foreign element.
Collective management body of a public joint-stock company
Under the revised Civil Code, all public joint-stock companies must have a collective management body (either a board of directors or a supervisory board) with at least five members.
Certification of decisions of the general shareholders/participants meeting
To protect the rights of shareholders and participants, as well as those of the commercial companies themselves, the revised Civil Code now requires that the adoption of decisions by the general meeting of participants/shareholders of a commercial company, as well as the list of the company participants/shareholders who were in attendance when it was adopted must be confirmed by:
- for public joint-stock companies – a registrar;
- for non-public joint-stock companies – a registrar or notary;
- for limited liability companies – a notary or in any other manner provided by the company charter or by a unanimous decision of the company’s general participants meeting (for example, by having all the participants sign the minutes).
Consequently, at present, all decisions of the general participants meeting of a limited liability company must be signed before a notary, unless another means of certification is provided for by the company's charter or by unanimous decision of the company’s general participants meeting.
Liability to the legal entity
A new Civil Code article increases the liability for the losses of a legal entity by its sole executive body, collective body members, and other persons who determine the activities of that legal entity, if it is proven that, when exercising their rights and performing their duties, they acted in bad faith or unreasonably, including if their actions (or inaction) did not meet the usual conditions of civil relations or the standards of entrepreneurial risk. The following are specifically introduced:
- the liability of the majority shareholder/participant for losses sustained by its subsidiary;
- the possibility of holding jointly and severally liable members of the management bodies of a legal entity, its majority participants/shareholders, as well as other persons who determine the activities of the legal entity; and
- the several liability of a parent company with its subsidiary for transactions concluded pursuant to the parent company’s instructions and with the consent of the parent company.
It is not possible to eliminate or limit such liability in a corporate agreement.
We anticipate that the above provisions will be reflected in amendments to the laws on joint-stock companies and on limited liability companies.
Power of attorney to act before the registration authorities to be notarised
New requirements have also been introduced as to the form of the power of attorney granted to submit and receive documents from the registration authorities. These are aimed at strengthening control over the good faith actions of legal entities in relation to various registration procedures. Previously an applicant’s representative could file and receive documents from the registration authorities under a power of attorney issued in writing, signed by the sole executive body of the legal entity, and sealed with the stamp of the legal entity.
In accordance with the new requirements, to submit and/or obtain documents from the registration authorities a representative acting under a power of attorney must show a notarised power of attorney (an original or a notarised copy thereof). This applies to the registration of any changes made to the Unified State Register of Legal Entities in respect of a legal entity.
Changes to the reorganisation and liquidation procedures for legal entities
The amendments to the Civil Code impacted the norms relating to the reorganisation and liquidation of legal entities. They provide, in particular, that it is now possible to:
- simultaneously combine different forms of reorganisation; and
- reorganise jointly legal entities of different legal forms.
Particular attention should be paid to the significant simplification of the procedure of reorganisation by converting a legal entity from one legal form to another form. In this case, the rights and obligations of the legal entity do not change in relation to third parties; only the rights and obligations with respect to the participants/shareholders change as a result of the reorganisation. The legal entity is now no longer required to give notice of the reorganisation to the company’s creditors, to publish an official announcement of the company’s reorganisation, and to form and transfer the company’s property, rights and obligations under a transfer act. The streamlining of the transformation procedure introduced by the new provisions of the Civil Code will supposedly facilitate the conversion of currently existing closed joint-stock companies into other legal forms, which are most likely to convert to limited liability companies.
The way in which the changes to the corporate norms of the Civil Code will be applied in practice will depend, among other things, on the adoption of amendments to other laws regulating corporate law. The relevant changes are expected to be adopted in the near future.
Authors: Irene Engel and Ernest Agayan.